Godbout report recommends cut to income tax, boost in user fees

Calling for a new fairer "tax mix," a blue-ribbon panel of experts is proposing to cut $4.4 billion in Quebec personal and business taxes, abolishing the unpopular health services tax and jacking up the provincial sales tax to 11 per cent.

Calling for a new fairer “tax mix,” a blue-ribbon panel of experts is proposing to cut $4.4 billion in Quebec personal and business taxes, abolishing the unpopular health services tax and jacking up the provincial sales tax to 11 per cent.

It also proposes to gradually increase the sin taxes, on tobacco and beer, and fuel taxes (one cent per litre per year) over a period of five years.

In fact, leaving no fiscal stone unturned, the Godbout commission into Quebec’s tax system even proposes taxing books, the Société Saint-Jean Baptiste, baby diapers, luxury cars, big electricity consumers and, dressed up in the form of a new eco-tax, the water you draw from your taps.

Made public Thursday, Luc Godbout’s eight month, $2.5 million study of the province’s taxation system has concluded the province’s tax structure needs a major overhaul to bring it into the modern age.

True to his personal philosophy, the Université de Sherbrooke tax expert says it’s time to take the focus off income tax and put it on consumption taxes and fees in a kind of “user pay” approach to public finances.

In fact, based on a fresh analysis of worldwide trends, Godbout said continuing to rely on income tax, even a progressive system based on revenue like Quebec’s, “is more damaging to the economy than the use of consumption taxes,” which stimulate it.

“The reform we are proposing is major,” Godbout said at a news conference flanked by the seven other tax experts who helped draft the report, commissioned by the government when it took power in April 2014.

Asked if any government could sell such reforms to the voters, Godbout said he was there to advise politicians, but they take the decisions.

But he added: “This reform is ambitious but workable. Our reform is realistic.”

After what is says was a “systematic” examination of close to 300 provincial tax measures, Godbout proposes juggling and reorganizing a total of $5.9 billion worth.

It would result in a reduction in personal income taxes of $4.4 billion and corporate taxes of $1.1 billion.

The trade-off is the increase in consumption taxes which would soar, pouring an additional $2.7 billion into the cash-strapped treasury.

The net effect on the government’s finances would be zero but Quebecers would have an additional $600 million in disposable income in their pockets and the economy would grow by $2 billion, creating 20,505 jobs.

Combined, Godbout’s measures would cut the gap in tax levels between Quebec and its main economic partner, Ontario, by a third and would almost eliminate it with other provinces.

The income tax reforms would mainly benefit the middle class demographic — those with incomes between $40,000 and $100,000, Godbout said releasing a 600 page report. For couples with school-aged children, the gains could reach $2,000 a year, but that would be offset by the higher sales tax.

But the change would also put an end of situations where low income earners are discouraged from making more money because the net result is they see benefits such as child care tax deductions clawed back.

The advice comes exactly a week before Quebec Finance Minister Carlos Leitäo publishes his second provincial budget which may or may not take into consideration the Godbout team’s ideas.

In his past, Leitäo — an economist by trade — has made favourable remarks about taking the onus off income tax to finance the state and focus more on user fees and consumption taxes.

But selling a sales tax increase — even one per cent as Godbout proposes — will be politically difficult.

At 9.975 per cent, Quebec’s combined provincial sales tax is already the second highest in the country. Nova Scotia’s sales tax is 10 per cent. Under Godbout’s proposal, combined with the GST, the rate would rise from 14.975 per cent to 16 per cent.

On Thursday, Leitäo issued a statement welcoming the report and saying the government wants to have “an open and constructive,” debate on its conclusions. He went no further.

But the opposition pounced.

“Raising the Quebec sales tax is not an option in the North American context,” said Coalition Avenir Québec finance critic François Bonnardel. “Quebec is not an island in the middle of the ocean.”

PQ critic Nicolas Marceau said he’s willing to debate the Godbout package but does not trust the Liberals, noting they are — in his mind — “compulsive taxers.”

“It would be better to tax the banks than a baby’s diapers,” snapped Québec-solidaire MNA Amir Khadir. “Are we that poor now in Quebec?”

On the other hand, the Conseil du patronat business lobby concurred with Godbout on the need to get away from the income tax dependency.

“Economically it is proven,” said Conseil president Yves-Thomas Dorval. “You get a better return on economic growth imposing sales tax than income tax. However, this has to be balanced. The issue is we don’t live in isolation. We have neighbours.”

The provincial restaurant lobby, for example, denounced the idea saying it will put their businesses at risk.

A quick cash hit, the sales tax has tempted many a government before. A one percentage increase in the sales tax generates $1 billion more for government coffers.

But Godbout casts a much wider net, putting on his list of income tax reductions the scrapping of the unpopular health services tax. Most people pay $200 a year but cutting it alone would result in a $734 million personal income tax cut.

Godbout also wants to increase in the basic personal amount — which is the threshold below which a taxpayer does not pay tax — from $14,281 to $18,000.

As for childcare fees, Godbout falls back on the same formula used by Lucienne Robillard in another report on finances. That would mean a $35 a day fee for daycare, but the increase would be softened by federal tax credits. Quebec has already ruled that out.

Another tough sell would be the hydro increase. The price to heat and light a small house would go up by $204 a year, a big house $664.

The price of pints of beer would go up by 40 cents over five years, a carton of cigarettes $5 over the same time frame.

It’s the kind of fine-tuning observers expected. At the base, Godbout proposes shaking up the personal income tax system — mainly by juggling the bracket system which determines how much you pay

The number of brackets — which determines the levels of tax paid on a range of salaries — would go from four to nine, with lower marginal tax rates reduced and upper ones left unchanged but applied to a greater income.

To encourage workers to stay in the workforce longer, the government would offer a $1,500 bonus for workers age between 60 and 65, and $2,500 beyond.

Comments

We encourage all readers to share their views on our articles and blog posts. We are committed to maintaining a lively but civil forum for discussion, so we ask you to avoid personal attacks, and please keep your comments relevant and respectful. If you encounter a comment that is abusive, click the "X" in the upper right corner of the comment box to report spam or abuse. We are using Facebook commenting. Visit our FAQ page for more information.